The historical cost principle states that assets and liabilities are recorded at:

• A. Current fair value.
• B. Their original cost at acquisition, not at current fair value.
• C. Estimated replacement cost.
• D. Market price at end of period.

Answer: (B)

The main concept tested is how assets and liabilities are valued for reporting: under the historical cost principle, they are recorded at the original amount paid to acquire them, plus any necessary costs to get them ready for use. For assets, that original cost becomes the carrying amount on the balance sheet, with depreciation or impairment adjusting it over time. For liabilities, it’s the amount of the obligation when incurred.

This is why the original cost option is best. It reflects the actual money exchanged and provides a verifiable basis for financial reporting, rather than market-driven values that can fluctuate.

The other bases describe different measurement approaches—current fair value, replacement cost, or end-of-period market price—which are not the standard for assets and liabilities under the historical cost principle, though some assets may be measured at fair value in certain circumstances or standards.